1 Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue, and Rule

references are to the Tax Court Rules of Practice and Procedure.

T.C. Memo. 1998-437

UNITED STATES TAX COURT

JEFFREY C. AND KELLY O. STONE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3812-97. Filed December 14, 1998

Jeffrey C. and Kelly O. Stone, pro se.

Joan S. Dennett, for respondent.

MEMORANDUM OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge Carleton D. Powell pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183.1 The Court agrees with

and adopts the opinion of the Special Trial Judge that is set

forth below. 
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2 Petitioners also testified that in addition to the

appliance repair business they conduct business activities

involving the sale of water and air filters and "Melaleuca"

sales. It does not appear, however, that either of these

activities generated any income.

OPINION OF THE SPECIAL TRIAL JUDGE

POWELL, Special Trial Judge: Respondent determined a

deficiency and an accuracy-related penalty for negligence under

section 6662(a) in petitioners' 1994 Federal income tax in the

respective amounts of $10,959 and $2,192.

The issues focus on whether certain expenses paid by

petitioners during 1994 are deductible under section 162. At the

time the petition was filed, petitioners resided in Belgrade,

Montana.

Before trial, petitioners filed a motion for summary

judgment raising various procedural issues concerning the

involvement of the Montana Department of Revenue and the Internal

Revenue Service examination of petitioners' returns for 1994

filed with the State of Montana and the Federal Government. 

Petitioners' motion for summary judgment was denied in the

Court's opinion at Stone v. Commissioner, T.C. Memo. 1998-314. 

We turn now to the underlying substantive dispute.

Background

The facts may be summarized as follows. Petitioner Jeffrey

C. Stone (Mr. Stone) operates an appliance repair business.2 Mr.

Stone has a shop in Belgrade that is approximately 8 miles from
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3 All amounts have been rounded to the nearest dollar.

petitioners' residence. Until September 1994, when Mr. Stone

hired a secretary, petitioner Kelly O. Stone (Mrs. Stone) helped

in the business by maintaining the business records and answering

the telephone. Mrs. Stone did not go to the shop; rather, she

performed these activities from petitioners' home. In 1994,

petitioners had four children, Toni, Teni, Tally Jo, and Tucker,

who were ages 12, 9, 7, and 4, respectively. 

On their joint 1994 income tax returns (Federal and State),

with regard to the Schedule C for the appliance repair business,

petitioners reported gross receipts in the amount of $82,369 and

a cost of goods sold in the amount of $28,890. Petitioners

claimed a deduction for expenses in a total amount of $42,737. 

Petitioners' 1994 Federal and State returns were prepared by Cody

& Co. As a joint project, respondent and the Montana Department

of Revenue audited Federal and State income tax returns that had

been prepared by Cody & Co. The Montana Department of Revenue's

audit of petitioners' 1994 State return resulted in adjustments

to the cost of goods sold and the disallowance of some of the

claimed expenses. The results of the audit were shared with

respondent, and a notice of deficiency was sent to petitioners. 

The following shows the expenses petitioners claimed during the

Montana Department of Revenue audit and the amounts that were

allowed by the Montana Department of Revenue and respondent.3
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 Expenses Claimed During Audit1 Allowed

Advertising $2,508 $2,324

Car & truck 12,425 9,822

Contract labor 893 - 0 -

Depreciation 1,088 - 0 -

Dues & publications 1,199 273

Interest--Home mortgage 580 - 0 -

Insurance 3,609 699

Laundry 765 - 0 -

Legal & professional 1,539 155

Meals & entertainment 780 - 0 -

Office expense 1,399 302

Repairs 4,207 38

Sales promotions 983 - 0 -

Security 754 - 0 -

Supplies 1,740 175

Taxes 1,451 15

Utilities 3,850 2,669

Travel 619 - 0 -

Wages, commissions & fees 2,813 1,257

Bad debt - 0 - 82

Freight - 0 - 150

1 These figures do not necessarily reflect the amounts shown on

the 1994 tax returns. They are taken from the stipulation of

facts submitted at the trial. It is unclear to the Court what

concessions, if any, have been made. Accordingly, the decision

will be entered under Rule 155 in order to reflect any

concessions that may have been made.

Of the $25,025 petitioners claimed during the audit for cost of

goods sold, the Montana Department of Revenue and respondent

allowed $24,238.

The auditing agent disallowed the expenses on the grounds

that (1) the expenses were not properly substantiated, (2) the

expenses were personal expenses, and (3) the expenses were not

business expenses. Petitioners appealed the Montana Department

of Revenues's determination to the State Tax Appeal Board of the

State of Montana. The Board sustained the Department. 
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Essentially, petitioners make the same arguments here as they did

before the Board.

Discussion

Section 162(a) provides deductions for "all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business". On the other hand, section

262(a) provides that "no deduction shall be allowed for personal,

living, or family expenses." To some extent, there is a

connection between an individual's personal expenses and his or

her business expenses. Thus, for example, while routine meals

are necessary for an individual to function in the workplace, the

expenditure is inherently personal and not deductible under

section 162(a). To establish the deductibility of an expense

under section 162(a), the individual must show more than a

tangential connection with the business: he or she must show

that the questioned expense is "directly connected" with a trade

or business. Sec. 1.162-1(a), Income Tax Regs. We look,

therefore, to the "origin and character" of the expenses to

determine whether they are deductible under section 162(a). Fogg

v. Commissioner, 89 T.C. 310, 315-316 (1987); see also United

States v. Gilmore, 372 U.S. 39, 49 (1963). Furthermore,

petitioners bear the burden of proof. Rule 142(a); INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992). With these principles

in mind, we turn to the disallowed expenses.
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1. Meal Expenses, Sales Promotions

Petitioners provided receipts or canceled checks for

approximately $1,523 paid to various restaurants and food stores. 

In addition, they provided receipts and canceled checks in the

approximate amount of $965 for "sales promotion". Included in

the alleged expenses are amounts expended for what Mr. Stone

described as "public relations" and "to get my name out." Other

alleged expenses were for Mr. Stone "just to grab a bite to eat",

the children's birthdays, Christmas presents for nephews, and

gifts and entertainment of friends who also were clients. Mr.

Stone was unable to identify the type of business that was

discussed at the time the entertainment or meal expenses were

incurred or the business reason for the gifts. 

With regard to the expenditures that involved the children,

petitioners argue that their children help in the business by

answering the telephone and in general, but unspecified, ways. 

We bear in mind that the children were quite young (ages 4

through 12), and regardless of the contributions they might have

made, these expenditures would have been incurred for personal

reasons. These are clearly personal expenses. With regard to

the entertainment of and gifts to friends, petitioners argue

that, if they derive any income from their friends for services

rendered, they are entitled to claim business expense deductions. 

While friendship with the recipient is not necessarily fatal to

the deductibility of an expense, petitioners must show that the
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predominant motive for the expense was related to the business,

and petitioners have failed to establish such a motive. Finally,

the costs of Mr. Stone's lunches are nondeductible. Murphey v.

Commissioner, T.C. Memo. 1975-317.

2. Travel Expenses

Petitioners provided receipts totaling $739 that they

maintain represent business traveling expenses. According to Mr.

Stone these expenses were incurred when they met with friends who

were or had been their customers, when they went to visit Mrs.

Stone's parents, and when they attended a baseball tournament in

Idaho Falls. It is apparent that the primary or dominant purpose

of these trips was personal, and whatever attention to business

matters there may have been was relatively insignificant. These

expenses are not deductible. Holmes v. Commissioner, T.C. Memo.

1983-442.

3. Home and Repair Expenses

Petitioners deducted various expenses with regard to their

personal residence including various repairs, utility services,

and supply expenses. The rationale for deducting these expenses

is that a telephone used by Mrs. Stone in the appliance repair

business was located on the ground floor of their residence,

which constituted 25 percent of the space of the home. 

Section 280A(a) provides generally that "no deduction * * *

shall be allowed with respect to the use of a dwelling unit which

is used by the taxpayer during the taxable year as a residence." 
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Section 280A(c)(1), however, provides a limited exception if "a

portion of the dwelling unit * * * is exclusively used on a

regular basis" as "the principal place of business for any trade

or business of the taxpayer" or "as a place of business which is

used by * * * customers in meeting or dealing with the taxpayer

in the normal course of his trade or business". There is no

evidence that Mr. Stone met with customers in the normal course

of his business at his residence. Accordingly, the only ground

upon which an exception to section 280A(a) could be based is that

the portion of the residence was used exclusively on a regular

basis as the principal place of Mr. Stone's business.

Even if we accept that a portion of petitioners' residence

was used exclusively for business purposes, the Supreme Court's

opinion in Commissioner v. Soliman, 506 U.S. 168, 174 (1993),

makes it clear that that portion of the residence must be "the

most important or significant place for the business". Under

Soliman, we need not decide where the most important or

significant place of business was: we need only determine

whether the dwelling was that place. It is quite obvious that

the so-called home office was not that place. Thus, section

280A(a) disallows any deductions with respect to the home. 

4. Cost of Goods Sold

Petitioners were unable to identify any error in

respondent's determination with regard to the cost of goods sold. 

We therefore sustain respondent's determination.
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5. Taxes, Insurance, and Miscellaneous Expenses

Petitioners claimed deductions for various expenditures for

taxes and insurance. Respondent disallowed most of these

deductions. With respect to the taxes paid to the State,

deductions were allowed on Schedule A, except for the cost of a

fishing license that was disallowed. With regard to the payment

for insurance, respondent allowed a deduction for the business

casualty insurance and disallowed deductions claimed for life

insurance or other personal insurance. See sec. 264. 

Petitioners have not established that they are entitled to

deductions in greater amounts than those allowed by respondent.

With regard to the balance of the disputed items, we have

reviewed the record and sustain respondent's determinations. 

Deductions were claimed for petitioners' cats and dogs on the

respective grounds that they were necessary to control the mouse

populations and provide security at the shop. The animals, at

least for the most part, were located at the residence. 

Deductions were also claimed for magazines such as People, Ladies

Home Journal, and Family Circle. Petitioners did not explain the

business purpose for these publications. These items speak for

themselves.

6. Section 6662(a) Penalty

Respondent determined that petitioners are liable for an

accuracy-related penalty under section 6662(a) for negligence. 

Section 6662(a) provides that "there shall be added to the tax an
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amount equal to 20 percent of the portion of the underpayment to

which this section applies." Section 6662 applies to "the

portion of any underpayment which is attributable to", inter

alia, negligence or disregard of rules or regulations. Sec.

6662(b)(1). Negligence "includes any failure to make a

reasonable attempt to comply with the provisions * * * [of the

Internal Revenue Code], and the term 'disregard' includes any

careless, reckless, or intentional disregard." Sec. 6662(c). 

Petitioners essentially contend that they were not negligent

because they relied on Cody & Co. to prepare their returns. Mr.

Stone testified that they were prompted to use Cody & Co.

because: "We found things that we probably could be able to--to

deduct, you know. I don't--wouldn't necessarily say they're

grey, but I think most of the CPAs * * * don't do a thorough job. 

They're not ready to push a little bit."

In differentiating between personal and business expenses,

there may be some "grey" areas, but the expenditures here do not

fall within those areas, at least not without a Herculean effort

of delusion. The claimed expenses here, as noted by the Montana

State Tax Appeal Board, are clearly personal living expenses of

petitioners.

Moreover, while reliance on advice may provide a defense to

negligence, it must be shown that the person rendering the advice

was competent to give that advice and that the taxpayer provided

him with requisite information. See Freytag v. Commissioner, 89
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4 Petitioners complain on brief that they had no

opportunity to "question" respondent regarding the deductions

petitioners claimed on their returns. The deductions, however,

were based on expenditures made by petitioners. We cannot

understand how respondent would have relevant information

concerning the nature of these expenditures.

T.C. 849, 888 (1987), affd. 904 F.2d. 1011 (5th Cir. 1990), affd.

on other issues 501 U.S. 868 (1991). There is nothing in this

record to indicate that whoever gave the advice was competent. 

Indeed, if in fact such advice was given, the competency of the 

adviser would be severely impeached by the very nature of

the advice. Respondent's determination of negligence is

sustained.4

Decision will be entered

under Rule 155.